The Shocking Truth: Trump’s Tariffs Won’t Rescue American E-commerce

Under the trump administration the new tariffs announced aimed at helping American businesses will not be able to reverse the fundamental dynamics. Historical evidence shows that when more tariff are applied it makes the products more expensive for American consumers. With minimum shift in market share to local sellers.

Chinese suppliers have over the time steadily increased their presence in US regardless of the tariff policies. Not only they are supplying goods to the American businesses but they have also started selling directly on major online US Marketplaces as well.

In his first term as the president Trump-imposed tariff on $283 billion on imports in 2018. A study confirms that all of these tariffs were completely passed through to the US domestic consumers. Not only the consumers but also to the importers. The extra cost paid because of the tariff was paid by the US consumers and importers, not the Chinese exporters. By the end of the year 2018 American consumers and importers paid almost $3.2 billion per month in additional tax cost.

With all that extra cost being paid, extra tariff rather than bringing the manufacturing back to US, businesses started to redirect trade flows. Instead of searching for a local manufacturer businesses who were heavily relying on importing goods from China started to build workarounds. Shipping from a third country and adjusting product classification to avoid tariffs. They reconfigured the whole supply chains and at the same time all this was helping the Chinese sellers and service providers make more money out of this situation.

Another evolution of the US consumer is Amazon training shoppers to look beyond the brand names. With e-commerce becoming increasingly “brandless”. This marketplace dynamic favors the businesses with the most efficient supply chains and lowest overhead costs, giving them an edge over the pricey brands. And these are the areas where the Chinese sellers pride themselves.

The next generation of the Chinese sellers have figured out that they have multiple strategic advantages over the US businesses. Which means that when US applied extra tariff on imports US business would hurt more than the Chinese Sellers selling products in US. Firstly, most of the Chinese sellers are manufacturers themselves or are closer to manufacturing than the US businesses. Secondly, they have special incentives on exporting goods from the Chinese Government in shape of subsidies and tax rebates. Lastly working with the US businesses for many years they have learned all the sophistications of the e-commerce market places.

No doubt that in theory this could be a beneficial step towards brining manufacturing back to US. And advocates of tariff say that it is a short-term pain for a long-term gain. But reality is that to divert even a small portion of manufacturing from China to US will take months if not years. On the other hand the impact of these increased tariff on the US businesses is devastating in the near future.

A recent analysis on e-commerce businesses uncovered majority of small brands and private label sellers in US are facing a severe cash crunch. Many of the businesses are not generating enough profit which they would be paying in terms of tariff. For the businesses providing functional products have hard time increasing the cost because that also hurts there business. Even if they do eventually the price burden goes to the consumers. Many are also unable to afford the increased tariff cost on the inventory that they already have in transit.

What’s next for the US small / medium businesses? They are evaluating some hard choices like taking loans to support there business, cancelling the purchase orders and abandoning shipments that are in-transit. They simply can’t afford to have those shipments cleared. Or to raise prices in a market which is already price sensitive. If authorities do not have any policy change many small businesses face the threat of going bankrupt. Interesting part is that this tariff policy was actually applied to help protect these very businesses.

Conclusion, the data suggests that historically when we had such situation it resulted in higher prices for the US consumers. Forced business to adapt complex supply chains. Worst case resulted in bankruptcies for some of the small businesses. In my opinion these tariffs will not save the US businesses or promote local manufacturing rather may accelerate the decline of the US businesses.